CITY FOCUS by SIMON DUKE: Paying the price for Sky's success

There can now be no doubt why Rupert Murdoch's News Corp is in such a rush to get its hands on BSkyB. After tens of billions of pounds of investment in sports, film and TV rights, Sky is reaping the rewards of a series of gutsy bets that nearly sank its parent company in the 1990s.

As sparkling results revealed yesterday, Sky is delivering profits of £20million a week from its customer base of more than 10million households.

In a tantalising glimpse of the rewards that full ownership would bring to News Corp, underlying profits soared by 26 per cent to £520million between July and December. Cashflow, meanwhile, jumped to nearly £800million as Sky sold more high-definition TV packages and phone and internet services to subscribers.

Rush for control: The unfolding drama of Rupert Murdoch's mission to get his hands on BSkyB

But this is only just the beginning of the bonanza that is to come.
Having spent heavily to carve out its vast entertainment empire, Sky's
investment cycle is drawing to an end. It means that ever-larger chunks
of its burgeoning revenues will turn into profits, to be shared out with
its loyal shareholders.

So far, so encouraging for Sky's investors. Paradoxically,
though, the 'metronomic' beat to Sky's ascent may not be a cause for
celebration for its controlling shareholder, News Corp.

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For the higher Sky's profits climb, the more the media
conglomerate may ultimately have to pay to buy the 61 per cent of Sky (up 5p to
762.5p) it does not already own.

This perhaps explains why News Corp boss Rupert Murdoch has
cancelled his annual trip to Swiss ski resort Davos this year in favour
of a week's sojourn in damp and murky London.

It also leaves Sky chief executive Jeremy Darroch in an invidious
position; on one level, the more effectively he performs in his job,
the more he risks irking his largest shareholder. Darroch yesterday
claimed he was 'sanguine' about the on-going 'noise' surrounding News
Corp's £7.5billion offer.

'News Corp just wants to see all its businesses running well,' he
told the Mail. 'You can get yourself tied up in knots if you
overintellectualise that (News Corp's position as predator and
shareholder) too much.'

Whatever the internal machinations, there is no doubt that
Murdoch's bid to gain full control of Sky has become one of the
political causes célèbres of the day. Following a very public dressing
down for Business Secretary Vince

Cable after he secretly bragged about 'waging war' on Murdoch,
final say on whether the controversial deal can go ahead now rests with
Jeremy Hunt.

The Culture Secretary, whose Conservative party enjoyed the
backing of News Corp's tabloids during the election, is currently
considering proposals from the Murdoch camp to soothe concerns that a
full takeover would damage the public interest. These are thought to
include measures to secure Sky News' editorial independence.

His decision, though, has been further complicated by the growing phone-tapping scandal at the
News of the World and vociferous complaints from much of Britain's media
industry.

A disparate group of newspaper and broadcasting groups -
ranging from the Daily Mail & General Trust to the BBC - joined
forces to oppose the deal, arguing that the Times, Sun and News of the
World owner would wield too much power if News Corp took full control of
Sky.

But Hunt may ultimately opt to follow the advice of media
watchdog Ofcom, which has recommended that the deal be investigated by
the Competition Commission under Britain's media plurality rules.

This would delay any deal by at least six months. Given the
strength of Sky's recent performance, a full inquiry could drive up the
price Murdoch would have to pay to buy out his fellow shareholders.

Yesterday's half-time results underlined why time is not on
Murdoch's side, and begged the question how much more would he have to
shell out if a takeover is pushed backed until later this year?

Last summer News Corp had a 700p-a-share bid rejected by Sky's
independent directors, who told them to come back with an offer in
excess of 800p. At that higher level, Sky would have to pay at least
£8.4billion to win full control.

But as Sheikh points out, the stock market has surged by 17pc
since News Corp's initial approach in June. That would lift the minimum
offer from 800p to 936p, implying an outlay of nearly £10billion for News
Corp.

With every day that Hunt sits on his decision, the stakes grow ever higher.